Selling little, earning more: the strategy of luxury companies is bearing fruit in a context of economic slowdown – Business & Finance


LONDON/PARIS: While millions of people wonder if they can afford an extra $1,000 on energy this year, others are spending another $10,000 on Hermes handbags as soaring prices leave wealthier people relatively unscathed.

A string of consumer companies, from spirits group Diageo to bag maker Birkin Hermès, said this week they were making money from their priciest products and expect to continue to do so, despite a cost of living crisis that shows no signs of abating.

Hermès announces an increase in profits in the first half

Significantly higher interest rates, runaway inflation and a protracted energy crisis lead to the conclusion that the global economy is heading into recession.

But millions of wealthier consumers are still sitting on a cushion of savings built up during the COVID-19 pandemic and eager to indulge after two years of restrictions.

Hermès announced a record quarterly profit margin on Friday, as sales rose sharply amid strong growth in Europe and the United States, and a rebound in China in June.

Chairman Axel Dumas said he saw no sign of a slowdown in any region, even though the company has raised prices by 4% this year.

Automaker Renault also said its turnaround strategy to sell fewer but more profitable cars was paying off and revised its full-year margin forecast upwards. The most expensive Renault cars can cost upwards of $100,000.

“The surprising resilience of European consumers can also be seen in the strong results of luxury brand owner Louis Vuitton, particularly in their fashion and leather goods, such as Fendi and Christian Dior,” Rebecca Chesworth, senior equity strategist at investor State Street SPDR ETF, said.

“Consumers taking advantage of the reopening of travel boosted sales of wines and spirits.”

Many consumers are bracing for a rapidly deteriorating economy this winter.

In Britain, for example, a price cap on typical household energy bills is set to rise from 1,277 pounds ($1,552) earlier this year to over 3,500 pounds by October, while the cost of food jumped 10% year over year. .

This will put hundreds of thousands of people in a precarious financial situation, unable to spend anything but the essentials.

Luxury watchmakers face growing demand, but time is running out

Food and personal goods companies such as Nestlé and Unilever have been engaged in tough negotiations with retailers since late last year, with supermarkets reluctant to raise prices for basic necessities and risk alienating consumers. buyers who are struggling to get by.

“Not all companies can (raise prices), only companies with pricing power that are doing relatively well – which have dominant positions in their respective industries – will be able to do so,” Wei Li said. , Global Chief Investment Strategist of the BlackRock Investment Institute. Reuters. “Focusing on quality players in the industry is important.”

While wealthier consumers’ savings are still being eroded by inflation, they currently seem focused on enjoying the freedoms that have returned with the easing of COVID-19 restrictions.

IAG, owner of British Airways, returned to profit for the first time since the pandemic on Friday, as more people flew in Europe between April and June.

“Comments suggesting forward bookings show no signs of weakening support the argument that pent-up demand for travel still far outweighs the impact of a cost-of-living crisis,” said Matt Britzman. , equity analyst at Hargreaves Lansdown.

IAG’s sales, on trips mostly booked outside Britain, Spain and the US, more than quadrupled to 9.35 billion euros ($9.55 billion) in the first half compared to last year.

“We have seen rapid recovery growth (in travel retail) as travel picks up again,” Diageo CEO Ivan Menezes told analysts on Thursday after tequila maker Don Julio and whiskey maker Johnnie Walker exceeded sales expectations for the full year.

To be sure, Menezes warned: “To get back to where we were, it will probably take another two years, maybe a little more.”

European lenders also offered positive earnings surprises this week, but investors are watching for signs of a weakening economy, soaring inflation and war in Ukraine that could affect their outlook.

Eurozone inflation hit a new record high in July and its peak could still be months away, keeping pressure on the European Central Bank to opt for another big interest rate hike in September. Read more

For now, however, French bank BNP Paribas reported better-than-expected quarterly profit on Friday, after provisions for bad debts fell and activity remained buoyant in both investment and retail banking.

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